South-Western College Publishing - Economics  
Maybe the West Was Never Meant to be Won-or Irrigated
Subject Prolonged Drought Threatens Sustainable Economy in the Western US
Topic Market Failure, Regulation and Public Choice; Utility and Consumer Choice
Key Words

Private Markets, Water Rights

News Story In 1922, hydrologists estimated the annual average flow of the Colorado River and helped several states broker a deal to divide up the water's flow for irrigation, drinking water, and other uses. The hydrologists' estimates were wrong-they estimated a much greater annual average flow than what actually occurs. And the West is now fighting to make up for that mistake.

The past six years of drought have caused many people to rethink the cyclical nature of wet and dry cycles. Now many are beginning to think that the norm may not be a mixture of wet and dry periods, but rather dry periods infrequently interrupted by brief periods of rain. In fact, the drought periods are no longer considered exceptional; rather, the wet periods are getting attention as unusual now.
Lake Powell, constructed in the 1950s on the Colorado River near Glen Canyon (split between Utah and Arizona), is now at 40% of its historic water level, and by 2007 may not have sufficient water to produce electricity or help sustain the flow of the Colorado. In fact, it would take a decade of heavy rainfall to fill it to previous levels. According to the treaty in 1922, along with a subsequent treaty (made with Mexico and dealing explicitly with Lake Powell), the lake must provide 8.23 million acre-feet of water each year, regardless of how much water comes into the lake. Given the miscalculation of the flow of the Colorado, Lake Powell now provides almost half of the flow of the river south.

Because of the lack of water, local areas have resorted to taking steps to curb water consumption. Besides increasing the rate charged for access to water, localities are prohibiting swimming pool construction, limiting the use of water for irrigation or watering lawns, or other perceived "unimportant" uses. Tourism in affected areas has diminished significantly, as people no long flock to Lake Powell, for example, to see the stories-high cliffs of bleached rock where water once hid it. Some area water companies are considering using substances designed to reduce evaporation of water, raising the height of Hoover Dam, and saving water in area aquifers for an even less rainy day. Some localities are also considering a market for water rights, in which area farmers and other consumers can auction off their rights to access river water, in exchange for money. While some argue that this is simply "water for the highest bidder", others argue that the only ones left are the ones with the resources to purchase the water.

(Updated July, 2004)

Questions
1.

Consider two uses (make up your own) for water in an area in southern California. How would you decide whether to limit use of water for either of those purposes? Upon what criterion would you base your decision? Why?

2. If an auction market for water rights were implemented in the west, what would happen to the prices for agricultural products grown in the west? Why? Trace the process carefully?
3. One of the classic arguments against the construction of a dam is that because the resulting lake behind the dam has a significantly greater surface area than the previous size of the river, evaporation of the water becomes a significant - and costly - problem. Given that the hydrologists underestimated the Colorado's true river flow in 1922, what has happened to the implicit cost of the evaporated water? Why?
Source Kirk Johnson and Dean E Murphy. "Drought Settles In, Lake Shrinks and West's Worries Grow." The New York Times. 2 May 2004.

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